Analyst Says iPhone Success Guides Google's Nexus One

Bernstein Research analyst Jeffrey Lindsay said in a research note that the phenomenal success of the iPhone, nearly 10 million units of which will ship through 2009 and whose Apple App Store offers more than 100,000 applications, has forced Google to take actions into its own hands in the smartphone market. Specifically, Google is creating the Nexus One as an unlocked alternative to existing Android phones, such as the successful Motorola Droid, to better challenge Apple's iPhone dominance. BroadPoint AmTech analyst Ben Schachter sees Google's move as a disruption in the space.

The unstoppable success of Apple's iPhone has pushed Google to create Nexus
One, a smartphone based on the Google Android operating system whose software
and features Google has built from the bottom up on hardware from HTC.
So claims one analyst.
Nexus One, which Google employees are testing, is expected to come to market
early next year, possibly in January, and allegedly with support from T-Mobile USA. However, the device will be
based on GSM technology and will be unlocked, meaning users can pick their
carrier to power it.

Bernstein Research analyst Jeffrey Lindsay said in a research note that the
phenomenal success of the iPhone, nearly 10 million units of which will ship through
2009 and whose Apple App Store offers more than 100,000 applications, has
forced Google to take actions into its own hands in the smartphone market.

"Specifically, we think Google is anticipating the expiration of Apple's
exclusive arrangement with AT&T reportedly in June 2010 (although never
confirmed by either side)," Lindsay wrote. "This would open the
possibility that Apple could get access to Verizon's superior 3G network,
challenging the Google/Verizon Droid initiative directly, and forcing Google's
hand to get more involved in the mobile data hardware space."
This means the iPhone might sell 12 million to 24 million units total on
both AT&T's and Verizon's networks next year. The Android-based Motorola
Droid is expected to sell 8 million to 9 million units in 2010, which is
respectable but no match for the iPhone running on the nation's top two
wireless networks.
Google, Lindsay added, wants to create a "pure" Android phone
based on Android's 2.1 build that bests the iPhone user experience to obviate
the fragmentation of the Android ecosystem. Currently, there are three Android
OS iterations kicking around for development-1.5, 1.6 and 2.0 (powering the
Motorola Droid).

However, Android developers are plagued by getting apps to work on all Android OS' across about 15
Android phones. Apple has one proprietary OS, and applications that make the
cut in its App Store are tightly controlled. For the iPhone, fragmentation is
not an issue, though disappointment among app developers who find their apps
rejected for not meeting Apple's strict regulations is.
Nexus One would ideally be a smooth, polished build that withstands
fragmentation. However, offering it unlocked is a gamble. U.S.
carriers subsidize mobile phone costs to make them more affordable to
consumers.
If unsubsidized by Google or a GSM carrier such as T-Mobile, such a device
would likely run $500, out of the price range of the common consumer. But that
seems to be what Google is doing to ramp up Android sales versus the iPhone.
"We think the strategy is risky because all previous attempts to sell
directly to the consumer in the U.S.
have thus far have been an abject failure," Lindsay wrote.
"Specifically we note the low appetite of American consumers for an
unsubsidized phone, and the huge acceleration in iPhone sales when Apple
lowered the (subsidized) retail price of the iPhone from $399 to $199,
suggesting that Americans still seem to have an insatiable appetite for handset
subsidies."
BroadPoint AmTech analyst Ben Schachter had a different take in his Dec. 14
research note, noting that Google wouldn't do this if it didn't think it would
disrupt the mobile phone market.

"We do not expect just another smartphone to compete with the iPhone.
We think Google will try to change the current model and influence the
development of the mobile Web in a more fundamental way. That could be through
some sort of advertising supported economic model, a mobile device more focused
on data than voice, the unlocked feature, etc.
"At the end of the day, this will not be a phone in the traditional or 'smartphone'
sense. We think it will be a mobile device that tries to challenge current
business models, notions of data versus voice, and how consumers should pay for
mobile services."

In controlling all of what goes into Nexus One, Google could create a mobile ecosystem where all of its various
services/applications run without breaking from fragmentation. This would include tighter integration with Google Voice, GPS-enabled
directions and mapping, location-based mobile advertising, and mobile searches.
Schachter said that while it is too early to predict how these models will
evolve, Google might be able to make a lot of money from ads associated with
mobile Web services, which would help it fully subsidize the cost of the phone
for users.